Change to thresholds
The tripling of the tax-free threshold from $6000 to $18,200 was touted as significant tax reform measure on Budget night. In reality, the tax-free threshold has only moved from $16,000 to $20,542 due to a simultaneous reduction in the low income tax offset (LITO). The low income tax offset reduces from $1500 to $445. Also the first marginal tax rate of 15 per cent rises to 19 per cent and the second marginal tax rate rises from 30 per cent to 32.5 per cent (shown in Table 1). Only those earning less than $80,000 will receive a tax cut. If our tax rates were indexed for inflation, there would be no need to adjust the tax-free threshold and personal income tax rates along the way.
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Wait and see
Whether the changes to the tax-free threshold will take a significant number of taxpayers out of having to lodge returns remains to be seen. The Government is indicating that one million taxpayers will not have to lodge tax returns as a result of the tripling of the tax-free threshold. However, if the taxpayer has had a withholding tax event or is entitled to a refundable tax offset then they will still need to lodge a tax return to receive a refund. The Government’s estimate relies on taxpayers not bothering to fully claim their entitlements, which would indicate that the estimate is grossly overstated. Time will tell.
Tax practitioners often complain when the tax system is used to hand out income tax offsets linked to Centrelink entitlements such family tax benefit (FTB) Part A that are out of their control. Practitioners will be relieved that they will not have to worry about the education tax offset for the 2012 income tax year. The Government announced in the 2012 Budget that the education tax refund (ETR) would be replaced by the new Schoolkids Bonus. The tax system will not be used to claim this offset for expenses incurred in 2011/12. Only taxpayers eligible for family tax benefit Part A are eligible to receive this offset.
What’s happening with GST?
The Henry review highlighted the need to remove inefficient taxes as well as the need to reduce income taxes in favour of higher consumption taxes. The GST represents our most significant consumption tax, yet only 60 per cent of all goods and services are included in its base. The other 40 per cent – including food, health and education – are growing sectors of our economy. But both political parties are lukewarm on the idea of increasing the rate or base of the GST for fear of a political backlash.
Apart from the political fallout, one of the reasons for not including the GST as part of the solution to reform our tax mix is its regressive nature. In terms of individual income and wealth, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich – that is, there is an inverse relationship between the tax rate and the taxpayer’s ability to pay as measured by assets, consumption, or income. It is ironic then that from 1 July 2012 we have a carbon tax which is itself a regressive tax. The Government will compensate low income earners to negate some of its impacts and the same process could be employed to deal with increasing the base and rate of the GST if there was the political will to do so.
If we cannot progress micro reform measures over the line then what hope do we have of getting the macro tax changes required to support long-term growth? Many recent studies have come to the conclusion that the removal of inefficient taxes will actually promote economic activity rather than the opposite. The problem for all governments is managing the transition and dealing with the winners and losers. This is the most challenging aspect of major reform. Our political cycles do not support long-term planning but this is what will be required to progress to the next level in a meaningful way.
